Gas Supply Changes in Turkey - Oxford Institute for Energy Studies

 
Gas Supply Changes in Turkey - Oxford Institute for Energy Studies
January 2018

                                                     Gas Supply Changes in Turkey

   1. Introduction
   The Turkish government is in the process of making significant structural changes in the country’s
   energy sector. In particular, it is planning to reduce the share of gas in the energy mix in the power
   generation sector mainly due to concerns regarding over-reliance on natural gas imports, which is a
   concern both commercially as well as from a strategic perspective. Because of previous rapid growth
   in gas consumption for electricity production, the biggest natural gas consumption sector in the country,
   gas demand growth projections have, in the past, been high. Thus, gas demand growth is not
   determined by BOTAŞ, the state gas transmission monopolist, but by the power production sector, and
   for this reason the government has been implementing a successful policy of reducing the share of
   natural gas in the power generation sector and substituting it through a scheme to support locally
   produced energy resources.1
   To help understand the new energy policy that the Turkish government has been implementing, it can
   be divided into three stages:

   1. The first stage involves a policy of decreasing Turkey’s absolute dependence on the major single
      gas supplier – Russia - which provides 53% of total gas imports. Turkey also intends to lessen its
      dependence on current import and transmission infrastructure capacity which is constrained and
      cannot meet gas demand in peak periods. It will diversify supply sources and gas import types (both
      pipeline gas and LNG/FSRU) to ensure imports are available from a wider range of available
      sources on competitive terms, at the same time storing more gas in the country once downstream
      infrastructure capacity allows.

   2. Stage two is to shift from an energy sector based mainly on imported natural gas to an integrated
      energy industry based on local resources such as coal and renewables, a move strongly supported
      by the government. In other words, Turkey is implementing a “national energy and strategic mining
      policy.”2 This will lessen dependence on external suppliers, and help develop the industrial sector,
      employment, and the economy.

   3. The third stage is to become a natural gas trading center, trading the excess gas that Turkey will
      have access to as a result of the implementation of stages 1 and 2.

   1
     For more information about demand decline and projection see: G. Rzayeva “Turkey’s gas demand decline: reasons and
   consequences”, OIES, April 2017, https://www.oxfordenergy.org/wpcms/wp-content/uploads/2017/04/Turkeys-gas-demand-
   decline-reasons-and-consequences-OIES-Energy-Insight.pdf.
   2
     Minister Berat Albayrak’s speech at the INGAS conference in Istanbul on 2-3 November 2017.
                                                                                            Gulmira Rzayeva
Energy Insight: 24                                                                 OIES Research Associate,
                                                  Senior Research Fellow, Center for Strategic Studies (SAM),
Gas Supply Changes in Turkey - Oxford Institute for Energy Studies
Dependence on Imports. Turkey has historically been highly dependent on energy imports from
various sources. As a result, the country’s annual energy bill has been in the billions of dollars, creating
a huge trade deficit of which fossil fuel imports accounts for almost 50%. 3 However, during recent
decades this dependence on energy imports has grown even higher, rising from 55% in the 1990s to
76% currently, with the result that Turkey now pays around $55 billion/year on imported oil, oil products,
natural gas and coal. The situation with natural gas is the most burdensome, as Turkey imported 46.4
Bcm of natural gas in 2016, more than 99% of its total gas usage, 4 with 53% coming from Russia.5
Table 1: Natural gas imports in 2016
                         Russia       Iran        Azerbaijan         Algeria      Nigeria       Spot         Total
                                                                                                LNG
           Source
           Bcm             24.5          7.7            6.5             4.3          1.2           2.1            46.4

           %                53           17             14               9             3            5             100
Source: EMRA.

However, thanks to a decline in gas demand starting from mid-2014, Turkey has managed to avoid
some of the pressure of rapidly increasing import dependence on external suppliers, and the
consequent effects not only on the country’s energy security, but also its internal political situation.
Seasonality of demand. Nevertheless huge seasonal gas demand fluctuations remain, and gas
demand during the peak winter season surges to a level that challenges BOTAŞ’s peak delivery
capacity, especially if gas imports are interrupted. Turkey’s current gas transmission system capacity
(as of October 2017), taking into account existing bottlenecks and daily entry point send out capacity,
is around 200 mcm/d excluding storage capacity, whereas peak demand, especially when the
temperature is below the seasonal norm, can surge to 260 mcm/d (Figure 1). 6 At such times BOTAŞ is
forced to prioritize residential use by instructing both state-controlled utilities and independent gas-fired
power producers (IPPs) to reduce gas consumption temporarily by as much as 50% of contractual
levels.
The demand seasonality is one of the reasons why Turkey is currently investing billions of dollars in the
expansion of the BOTAŞ gas transmission system and the capacity of land-based and FSRU LNG
receiving terminals, and in the construction of two new import pipelines—TANAP and TurkStream.
These projects will remove bottlenecks and help solve the capacity issue. They will also strengthen
BOTAŞ’s hand in the negotiation of price and other contractual terms with the suppliers, especially in
the 2020s when all current Long-Term Contracts with pipeline suppliers are due to expire.
Increase in capacity. BOTAŞ expects its maximum daily gas supply capacity to almost double by
2023, from the current 252 mcm/d (including storage capacity) to 473 mcm/d7 as new projects come on
stream. This will extend Turkey’s ability to import gas from various sources by eliminating technical
constraints. By doing so, Turkey intends to ensure supply security during the peak demand seasons
and to reduce its dependence on existing suppliers, allowing it room to manoeuvre between them and
other new options.
Turkey is also expanding capacity at its existing LNG receiving terminals and building new FSRUs (Map
3), taking advantage of the fact that this method of importing natural gas is available in a flexible and

3
  Turkey’s trade deficit in May 2017 was $7.3 billion, and had grown from $4.2 billion in October 2016.
4
  According to EMRA’s 2016 report, in 2016 9 upstream companies in Turkey produced 367 mmcm 3 of gas which is less than
3.67% in comparison with the production level in previous year. Total gas import in the country last year was 46.4 bcm. The gas
production in the country constitutes only 0.8% of total consumption.
5
  Turkish Natural Gas Market Report 2016, Republic of Turkey Energy Market Regulatory Authority (EMRA), Ankara 2017,
http://www.epdk.org.tr/TR/Dokumanlar/Dogalgaz/YayinlarRaporlar/Yillik.
6
  Argus Turkey Report, September 2016 (Available for subscribers).
7
  BOTAS presentation.

The contents of this paper are the author’s sole responsibility. They do not necessarily represent the views of              2
the Oxford Institute for Energy Studies or any of its Members.
Gas Supply Changes in Turkey - Oxford Institute for Energy Studies
near immediate manner. This will give BOTAŞ and private companies an advantage in meeting the
growing demand in winter time, instead of having to increase annual pipeline contract quantities (ACQ)
due to the application of “take or pay” clauses.
Nevertheless, current government policy may seem anomalous: giving guarantees to both BOTAŞ and
private LNG companies to increase infrastructure capacity and almost doubling its multi-billion dollar
investment, at a time when overall demand in Turkey has been decreasing for the last three years, with
only modest growth expected in the next few years.
New import sources. This paper aims to look at Turkey’s imports from Ankara’s perspective, in addition
to its options and plans in the longer run when additional import projects could be available. It will
discuss how Turkey is reacting to the various options and what the benefits/ stakes/concerns
surrounding each option are. The issues arising from the availability of gas (from Azerbaijan, KRG
(Kurdistan Regional Government) and Iran), the complex political and contractual relations with
suppliers (Russia and Iran), infrastructure capacity expansion (LTC LNG/FSRU, spot LNG,
transmission system, TANAP, and TurkStream) will be discussed from the perspective of Turkey’s
energy economy. Having discussed this, the paper will look at Turkey’s objective view and its ability to
balance and manoeuvre between suppliers from the perspective of its political, commercial, energy
security, and contractual interests.
With the development of TANAP and TurkStream, Turkey is effectively becoming a key transit route for
the southeast European market. This paper will therefore also look at the wider implications for Europe
- whether to accept gas through Turkey from a project it strongly supports—TANAP—and/or a project
it strongly opposes—TurkStream.

2. BOTAŞ gas transmission system capacity extension
New investment in pipelines. BOTAŞ is investing billions of dollars in expanding its gas transmission
system capacity. This includes laying down new pipeline spurs to regions where none exist, building
compressor stations, participating in two new international pipeline projects, increasing the capacity of
existing LNG terminals, building new ones (including FSRUs) and increasing the existing storage
capacity. Although building new pipelines and providing natural gas pipeline coverage to the entire
country can be seen as more of a social project and part of the government’s responsibility to secure
access to natural gas even for the populations of remote regions, investing in additional entry point
capacity by constructing new infrastructure projects is a policy that appears to contradict the current
situation, given that annual gas demand has been falling for the last three years8, with only slow growth
anticipated over the next decade. Nevertheless, the government continues to give capacity expansion
guarantees to BOTAŞ and private companies that will almost double the entry point send out capacity.
This can be explained by the government’s wish to ensure supply security and eliminate bottlenecks
during sharp peak demands. But, inevitably, one result of increasing pipeline capacity will be to drag
down even further the overall utilization rate of Turkey’s gas infrastructure from the figure of around
63% in 2016.9

8
    G. Rzayeva, OIES, April 2017
9
    Turkey's uncertain gas future, Interfax Energy Special report, October 2017. Available for subscribers.

The contents of this paper are the author’s sole responsibility. They do not necessarily represent the views of   3
the Oxford Institute for Energy Studies or any of its Members.
Gas Supply Changes in Turkey - Oxford Institute for Energy Studies
Figure 1: Turkey’s seasonal gas demand fluctuations, Bcm/month

Source: World Energy Council, http://dektmk.org.tr/upresimler/QR6TR.pdf

BOTAŞ’s natural gas pipeline grid is already well-developed, covering key demand districts and gas-
fired power and industry segments. Almost the entire country has been connected to the grid except for
three provinces (583 districts)—Sirnak, Hakkari, and Artvin (Map 1). In 2016, 479 km of natural gas
pipelines were constructed and the total length of the pipelines has now reached 13,443 km. 10 The
company plans to lay down an additional 11km of pipeline in Sirnak by December 2017, 8 km of pipeline
in Hakkari by August 2018, and 76 km in Artvin by November 2018. 11

Map 1: Turkish provinces served by the BOTAŞ natural gas grid

Source: BOTAŞ

10
  BOTAS presentation.
11
  Albayrak: 2018’de doğalgazsız şehir kalmayacak, Milliyet, October 2017, http://www.milliyet.com.tr/albayrak-2018-de-
dogalgazsiz-ekonomi-2533638/.

The contents of this paper are the author’s sole responsibility. They do not necessarily represent the views of          4
the Oxford Institute for Energy Studies or any of its Members.
Gas Supply Changes in Turkey - Oxford Institute for Energy Studies
Map 2 shows the four existing entry points into the Turkish grid for pipeline gas imports from Azerbaijan,
Iran and Russia. These are at Türkgözü on the eastern border of the country, accepting gas from
Azerbaijan with a total capacity of 19.1 mcm/d; Gürbulak, in Bazargan, with a total capacity of 28.6
mcm/d through which gas from Iran is delivered; Durusu, with total capacity of 47.3 mcm/d, the entry
point for gas shipped through the Blue Stream pipeline; and Malkoclar, accepting Gazprom gas from
the Western Line pipeline with total capacity of 51.4 mcm/d.
Transmission constraints. BOTAŞ’s gas transmission system entry point send-out capacity is
constrained in all directions, and this limits the company’s ability to offtake gas from all pipeline and
LNG suppliers at the maximum level of ACQ, or above these volumes when necessary.
For instance, BOTAŞ imports around 14 bcm/year of gas to the eastern part of Turkey from Azerbaijan
and Iran. The industrially less developed eastern and southeastern regions consume only around 3
bcm/year of gas, with the central and western part of the country consuming the balance of the supply.
For this reason, BOTAŞ has to transport substantial quantities of gas from the east to the west, and
due to bottlenecks in the system has been unable to do so when import volumes are increased in winter
time to meet seasonally high demand.
This creates difficulties for BOTAŞ in meeting its contractual obligations to offtake the minimum level of
contracted volumes and avoid paying fines in compliance with “take or pay” clauses applied in all the
import contracts of BOTAŞ and private companies. To solve this problem, BOTAŞ plans to build four
compressor stations in the eastern and central parts of the country. The Hanak compressor station,
which will add 13.4 MW of capacity, was due to be commissioned by December 2017 to solve the
capacity constraint issue with gas imports from Azerbaijan. The 10.5 MW Doğubeyazıt compressor
station will also transmit gas from Azerbaijan and is due online in July 2018. The 16 MW Sivas
compressor station will also be handed over in July 2018 and will also help resolve the bottleneck in
transporting gas from the east to the central part of the country. The 15.3 MW Sungurlu compressor
station is planned to be built in the north-central part of the country by August 2019. 12
Supply interruption. The existing technical barriers and bottlenecks in the pipeline infrastructure led
to BOTAŞ imposing limitations on both state-controlled utilities and independent gas-fired power
producers (IPPs) during January 2017, when the temperature was below the seasonal norm. It is
possible to offset the shortage of natural gas in the power generation sector with hydro power during
the wet season, however, gas shortages typically occur when the season is dry and insufficient
renewable energy, which is strongly supported by the government, is produced to offset the natural gas
shortfall.
Storage. The storage capacity in Turkey is limited. In 2017 BOTAŞ-owned Tuz Gölu (Salt Lake) and
Marmara Değirmanköy had storage capacities of only 31 mcm/d and 3 bcm/y.13 This does not allow
BOTAŞ to stock large volumes of gas during low demand periods and sell it during the heating season.
Instead, BOTAŞ seeks gas from private firms, which could have stocks at the Silivri storage facility
owned by Turkish state company Türk Petrolları (TP) to sell during the high demand season.
New supply sources. BOTAŞ and private LNG importing companies have not been able to increase
import volumes and find alternative supply sources which would increase supply diversity, and might
lead to a relaxation in contractual terms.
Turkey, through its state company BOTAŞ, is however, with international partners realizing two new
international pipeline projects—TANAP and TurkStream. These will add three more entry points and
almost double the total send out capacity of the system, in conjunction with other new projects. Both
new pipeline projects will contribute to Turkey’s supply security and allow BOTAŞ to receive and
transmit extra gas through its system and help meet demand surges when required.

12
     BOTAS close presentation.
13
     Botas close presentation

The contents of this paper are the author’s sole responsibility. They do not necessarily represent the views of   5
the Oxford Institute for Energy Studies or any of its Members.
Gas Supply Changes in Turkey - Oxford Institute for Energy Studies
TANAP will cross through Turkey delivering Azerbaijani gas to European customers with delivery points
in Turkey at Eskisehir and Trakya. BOTAŞ will offtake its 6 bcm/year of Shah Deniz Phase 2 (SD2)
contracted gas from mid-2018, at Eskisehir, which will have a capacity of 16.4 mcm/d. The Trakya entry
point will deliver up to 8.4 mcm/d from the Azerbaijan SD2 field, with room for later expansion. Finally,
the planned new Kıyıköy entry point, with a capacity of 47 mcm/d, will be the point at which BOTAŞ and
Turkish private companies will receive their gas through the dedicated TurkStream pipeline (Map 2).

Map 2: BOTAŞ gas transmission system entry point capacity, mcm/day

Source: BOTAŞ.

In this context, the daily natural gas supply which will enter BOTAŞ Transmission System from the
Eskişehir location will be 16.4 mcm/d. In addition, at Trakya-Keşan, TANAP gas will enter the BOTAŞ
transmission system via a second measurement station with a capacity of 8.2 mcm/d (Table 2).
Projected pipeline import capacity. BOTAŞ currently projects that the capacity of the Western
(Balkan) pipeline through which BOTAŞ and private companies currently import 14 bcm/year from
Gazprom, will be downgraded from the current 51.4 mcm/d to 14.7 mcm/d after 2019, when TurkStream
will come online and Gazprom will reduce its gas supplies to Turkey and southeast European customers
through Ukraine by a factor of 3.5 (Table 2).
There are no plans to expand the capacity of Blue Stream, the Iran–Turkey pipeline, and the Baku–
Tbilisi–Erzurum (BTE) pipeline, which delivers gas from SD1 to the Turkgozu entry point, in the longer-
run. The capacity of BTE is not expected to be increased in the foreseeable future because after 2022,
when the long-term contract with the Shah Deniz (SD) consortium is due to expire, gas production from
the SD Phase 1 development most likely will be declining and there will not be sufficient volume to
extend the contract. It is most likely that Phase 2 will replace Phase 1 volumes once the contract
expires. Any possible additional volumes from Azerbaijan most likely will be delivered through TANAP.
Therefore, all the additional send out capacity in the system will be supplied by the new TANAP and
TurkStream pipelines. Startup volumes of around 2 bcm/year from the SD2 field will be delivered to the
Turkish market through TANAP starting from 2018, reaching the planned plateau level of 6 bcm/year in
2021.

The contents of this paper are the author’s sole responsibility. They do not necessarily represent the views of   6
the Oxford Institute for Energy Studies or any of its Members.
Table 2: Pipeline entry points and capacity, mcm/day

Entry Points                                    2017          2018          2019          2020          2021          2022    2023

Malkoçlar-Balkan                                51.4          51.4          51.4          14.7          14.7          14.7    14.7

Durusu-Blue Stream                               48            48            48            48            48            48      48

Gürbulak-Iran                                   28.5          28.5          28.5          28.5          28.5          28.5    28.5

Türkgözü-Shah Deniz                              19            19            19            19            19            19      19

Eskişehir-TANAP                                   0            5.7          11.3           14           16.4          16.4    16.4

Trakya-TANAP                                      0             0             0             0            8.2           8.2     8.2

Kıyıköy-TurkStream                                0             0             0           46.9          46.9          46.9    46.9

TOTAL                                          146.9         152.6         158.2         171.1         181.7          181.7   181.7

    Source: BOTAŞ

    3. Gas supplies from current sources
    As of 2017, Turkey has four international gas import pipelines with total technical import capacity of
    146.9 mcm/d (52.9 bcm/year)14 through which it imports gas from Azerbaijan, Iran, and Russia. Given
    the import contract portfolio (Table 3), the dominance of BOTAŞ in gas imports into the country will
    remain unchanged at least until 2026, despite the provisions of Natural Gas Market Law 4646 (NGML
    2001) on liberalization of the gas market. As required under the Law, BOTAŞ transferred 4 bcm/year to
    private importers (Enerco Enerji, Bosphorus Gaz, Avrasiya Gaz, and Shell Enerji) as a result of a
    contract transfer tender process conducted in 2005. The companies started importing gas from
    Gazprom Export LLC via the Western Route in 2009, and the contracts between Gazprom and the
    private importers will expire in 2021. The 6 bcm/year BOTAŞ Long Term Contract with Gazprom expired
    at the end of 2011 and, in conformity with NGML 2001, BOTAŞ did not extend it. The volumes were
    instead transferred to four private companies (Enerco Enerji, Bati Hatti, and Kibar Enerji), which enabled
    them to import 6 bcm/year from Russia via the Western Line pipeline starting from 2013, lasting until
    2043. Apart from these seven private companies, no new contract transfers or auctions have taken
    place since 2009.

    14
         Botas presentation

    The contents of this paper are the author’s sole responsibility. They do not necessarily represent the views of           7
    the Oxford Institute for Energy Studies or any of its Members.
Table 3: BOTAŞ long-term contracts with its suppliers
                             Volume
Current Agreement          (bcm/year)        Date of Agreement                                  Status              End Date
Algeria (LNG)                               4.4                         1988                 In operation            Oct-24
Nigeria (LNG)                               1.3                         1995                 In operation            Oct-21
Iran                                        9.6                         1996                 In operation            Jul-26
Russia (Blue Stream)                        16                          1997                 In operation          End of 2025
Russia (West)                                4                          1998                 In operation          End of 2021
Turkmenistan                                15.6                        1999                   Pending
Azerbaijan (Phase 1)                        6.6                         2001                 In operation            Apr-21
Azerbaijan (Phase 2)                         6                          2011                  2017/2018            2032/2033
Azerbaijan (BIL)                            0.15                        2011                 In operation             2046
 Source: BOTAŞ.

 Turkey’s major concern in relations with the current gas suppliers relates to its biggest gas supplier,
 Russia, from which it currently imports 53% (24.54 bcm) of its total natural gas consumption. This has
 led to both energy security concerns and potential geopolitical risks. Consequently, Turkey has been
 trying to decrease its energy dependence on Russia by reducing the share of gas in the energy mix
 and expanding downstream infrastructure to ensure alternative import sources and supply. There is no
 doubt that these measures will strengthen the position of Turkish companies in negotiations for new
 contracts with Gazprom as well as other suppliers after the current contracts expire in the 2020s.
 Nevertheless, the figures show that Turkey is in fact increasing its energy dependence on Russia - by
 concurrently building new projects such as the TurkStream natural gas pipeline and the Akkuyu Nuclear
 reactor.
 Contract terms. Turkey’s main concerns with regard to all the long-term contracts, including the
 contract with Gazprom,that Turkish importers will want to address are:
        a) Price: BOTAŞ is in arbitration at the UN Commission on International Law with Gazprom over
           a promised 10.25% discount on the standard gas contract price. A preliminary agreement was
           reached, with a price reduction to be backdated to the start of 2015. However, the agreement
           was not signed because Russia had made the cut conditional upon the signing of an
           intergovernmental agreement for the 31 bcm/year TurkStream pipeline project as relations
           between the two countries soured in late 2015. Separately, five private Turkish importers have
           been in arbitration with Gazprom since February 2017 over gas prices in 2017. A decision will
           only come in 2019, as the parties did not reach a deal in October before the court’s ruling.
             This situation creates difficulties with some Turkish wholesale companies that may be reluctant
             to renew contracts with private sector importers for 2018 if the import price uncertainty
             continues. The problem is that private sector importers have been selling gas to wholesale
             marketers at prices anticipating a 10.25% price reduction from Gazprom, including clauses that
             the marketer will pay more if the importers do not get the discount. Wholesalers are taking the
             risk this year, as they need to meet obligations from contracts with consumers, which were
             concluded in late 2016 when there was no indication of a long-term price dispute between
             importers and Gazprom. They may not take the same risk for 2018 and could either shrink their
             portfolios or decide to exit the market15.
             Private sector importers’ contractual volumes with Gazprom are 10 bcm/year, while their
             combined take-or-pay obligations are estimated at around 8 bcm/year. Of these, private-sector
             importers have sold around 5 bcm/year to wholesale firms under long-term contracts that

 15
      Argus Turkey report, September 2017

 The contents of this paper are the author’s sole responsibility. They do not necessarily represent the views of               8
 the Oxford Institute for Energy Studies or any of its Members.
include 2018,16 but importers may face difficulty in securing sales for the remaining 3 bcm/year
          for 2018 unless a deal on import prices is reached this year.
          Surprisingly, this did not encourage Gazprom and the private companies to reach an agreement
          in October before the official filing of the case, as Gazprom is aiming to achieve record sales
          and maintain its market share in Turkey, while Turkish importers need to meet their take-or-pay
          obligations.
          All the BOTAŞ and private importers’ LTCs are linked to oil and oil products prices, which
          fluctuate seasonally as well as responding to other oil market issues. The Turkish importers
          would want to change the indexation in a new contract and obtain a lower price for the imported
          gas.
          Turkey’s Russian pipeline gas import costs are expected to increase in the fourth quarter of
          2017 in line with higher crude-linked prices. According to an Argus Turkey Report, fourth-
          quarter oil-indexed gas prices, assuming a 10% discount from Gazprom, were around
          Euro17/MWh ($211/mcm) for the end of September17 (Figure 2), a significant increase from the
          previous months, in line with the rise in oil prices caused by lower stock levels, a stronger
          demand outlook and continued OPEC and non-OPEC production cuts. It is expected that the
          cost of Russian gas will continue to rise as demand surges in winter. BOTAŞ and private
          importers will attempt to obtain the 10.25 % discount in the new contract even if the arbitration
          decision is negative.
          Although BOTAŞ received a 13.3% discount on the standard contract for Iranian gas in 2016
          as a result of an arbitration ruling,18 the Iranian gas price remains relatively high in late 2017 —
          above $200/mcm (Figure 2), and is likely to rise further in the first quarter of 2018, the coldest
          months in Turkey. However, the price cut received makes it most likely that the Turkish
          importers will have less incentive to review the pricing in a new contract.
          The Shah Deniz Phase 1 gas price was the highest price for imported gas in the third and fourth
          quarters of 2016 and remained so in the first and second quarters of 2017, but in the third
          quarter of 2017 was the same as the Iranian gas price—slightly above $200 (Figure 2).
          However, it is most likely that the price rise trend will continue in the following two quarters. It
          is most likely that BOTAŞ and private importers will want to review pricing in the new contract.
     b)    “Take or pay” clause: This exists in all the LTCs with Turkey’s pipeline gas suppliers. The
          Gazprom contract’s ToP clause for gas delivered through the Western Line pipeline to BOTAŞ
          is 80 % with a make-up period of five years, whereas with private companies it is a minimum 8
          bcm/year of gas offtake volumes out of a 10 bcm/year ACQ. There is a 25-year make up period
          for gas imported through the Blue Stream pipeline, which is much better for BOTAŞ. The Shah
          Deniz Phase 1 ToP clause minimum offtake volume is 75 % with a make-up period of four
          years. There is an 80% minimum offtake in the contract with Iran with a 5-year make up period.
          Strong seasonal fluctuations in gas consumption make it difficult to compensate low offtake in
          low demand seasons with high offtake in high demand periods, especially in the eastern part
          of Turkey as capacity constraints in the BOTAŞ grid there restrict imports. Up to 2015 BOTAŞ
          was not able to import 6.6 bcm/year of contracted gas from Azerbaijan because of these
          constraints. The problem is being solved with the construction of the new Hanak compressor
          station.

16
   Argus Turkey report, September 2017.
17
   Argus Turkey report, September 2017.
18
   Turkey wins gas price row against Iran in court, Hurriyet Daily News, February 2016,
http://www.hurriyetdailynews.com/turkey-wins-gas-price-row-against-iran-in-court-94643.

The contents of this paper are the author’s sole responsibility. They do not necessarily represent the views of   9
the Oxford Institute for Energy Studies or any of its Members.
c)    Destination clause: In 2016 BOTAŞ re-exported 0.67 bcm/year of Azerbaijani gas to Greece, 19
          but has not been able to do so with Russian and Iranian gas because of destination clauses in
          the contracts. It is most likely that BOTAŞ, in line with the government’s ambition to become a
          gas exporting country in the next ten years, will attempt to lift this condition in the contracts
          during renegotiation. However, it should be noted that even now, with 6.6 bcm/year of SD gas
          and LNG, both LTC and spot, BOTAŞ can actually export around 10 bcm/year of gas. Due to
          infrastructure capacity constraints this has not been possible to date.

Figure 2: Natural gas price for Turkey, $/mcm

Source: Argus

Future contract negotiations
It is quite difficult to predict what will happen after the present contracts expire, however, it is most likely
that the 4 bcm/year of gas imported by the four20 Turkish private sector companies through the Western
Line pipeline from Gazprom will be renewed after the contract expires at the end of 2021. According to
the NGML, no private company can import gas from a country with which BOTAŞ has a supply contract
in operation, and the companies do not have import licenses to replace Russian gas with gas from other
sources. They may however import LNG from various sources. Contract extension will largely depend
on the price agreement between the companies and Gazprom, which will be clarified by the arbitration
ruling in 2019. BOTAŞ’s 4 bcm/year of contracted imports through the Western Line is also very likely
to be renewed after 2021 as the company does not have any realistic alternative source to replace the
Russian gas, should any political crisis recur, except LNG, which is currently almost 20% more
expensive than imported pipeline gas.21 Similarly, there is no serious reason not to renew the contract
for 16 bcm/year imported by BOTAŞ through the Blue Stream pipeline, which is due to expire at the
end of 2025 and has a better ToP clause than any other LTC. Furthermore, 16 bcm/year from a single
source delivered to the north-west part of the country is vital in terms of supply security and energy
security of the most-intensely gas-consuming region and cannot be put at risk.
Azerbaijan is Turkey’s only natural gas supplier that has not been involved in a serious price dispute
with BOTAŞ or subject to other political or geopolitical tensions. The SD1 field started producing in late
2006, reached its plateau level in 2010, and should enter its tail-off in 2024–2025, when production
levels may decrease by around 2 bcm/year or more, depending on well productivity. There may not be
enough natural gas to renew the SD1 contract for a longer term. The 15-year sales and purchase

19
   EMRA Annual Report 2016.
20
   Shell, Bosphorus Gaz, Enerco Energy, Avrasiya Gaz A.S.
21
   The LNG price for Turkey in the first half of December was assessed by Argus at $8.8/mn Btu and at $8.9/mn Btu in the
second half of December (delivered price, including freight).

The contents of this paper are the author’s sole responsibility. They do not necessarily represent the views of            10
the Oxford Institute for Energy Studies or any of its Members.
contract signed by the SD consortium and BOTAŞ to import 6 bcm/year of SD Phase 2 natural gas
could simply replace the 6.6 bcm/year of SD1 gas, rather than being an additional volume. Another
scenario is that the remaining volume from SD1 could be added to the contracted 6 bcm/year of SD2
natural gas. Realization of this scenario will strongly depend on whether both seller and buyer would
be interested, financially and legally, in the exchange of SD1 volumes under the SD2 contract.22
Turkey does not have any choice other than to renew its sales and purchase contract with Iran upon
expiry in 2026 because there is no other source of gas to fill this contracted volume. Problems with
natural gas supplies and other disagreements between the two countries have always made
relationships complicated. Delivery shortfalls during the peak seasonal demand in Iran have been one
issue, but BOTAŞ’s inability to take all contracted volumes due to transmission system capacity
constraints in the eastern part of Turkey and temporary reductions in demand during low demand
seasons are also important. Turkey has sought a 30% price reduction and, a removal of the “take or
pay” clause, and has taken the case to arbitration twice. In both cases, Turkey won, receiving $800
million23 and $1 billion, a 13.3% price reduction. As a result of the 13.3% discount the Iranian gas price
has been the lowest available since the second quarter of 2016, and remains so in third quarter of 2017,
along with SD2 gas (Figure 2).
Last year Turkey imported only 7 bcm/year from Iran out of the contracted 9.8 bcm/year, despite the
price cut. In the short- and mid-run it is unlikely that Iran will be able to export extra volumes of gas to
Turkey due to rapidly growing domestic demand, gas injection into the oil fields, and plans for the export
of value-added petrochemical products using gas as feedstock.

4. Potential new suppliers: Iraq and the East Mediterranean region
There are two potential alternative sources of gas supply to Turkey - Iraq and the East Mediterranean
region (EastMed) – but supplies from both are fraught with political, geopolitical and economic difficulty,
so that their materialization remains relatively remote. Turkey remains hopeful about possible gas
imports from these two regions, and its role as a transit country to Europe, but fully realizes the existing
financial and political obstacles.
The Kurdistan Regional Government (KRG) has always been deemed a strong option for new supply
to Turkey. Turkish officials have in the past repeatedly referred to the fact that if a transport solution
were to materialize, natural gas from northern Iraq would be the cheapest option for imports to Turkey.
However, the main obstacle lies in security issues. Companies operating in northern Iraq need
increased financing to fund security, and the influx of refugees to KRG combined with terrorist attacks
in Iraq has led companies to hold back from investment in the upstream and mid-stream business.
Furthermore, the recent pro-independence referendum in KRG and strong opposition from the Turkish
government to the possible independence of Kurdistan has frayed bilateral political relations. Seeking
unprecedented sanctions against the autonomous region, the central Iraq government in Baghdad
attempted to restrict trade at the borders of the Kurdistan region and in addition has sought to unite with
Turkey and Iran in its policies.
Now that the Iraqi central government seems to be taking control over KRG and its border with Turkey,
all decisions with regard to energy resource exports will most likely be taken by the central government.
This has already led to intense conflict between the KRG and Baghdad over Iraq’s northern exports, in
particular over the federal government’s attempts to move further towards realizing its ambition to
become a major gas exporter. The existing tensions between the two governments may delay any gas
project developments in Kurdistan itself. Turkey is expected to refrain from any possible confrontation
with KRG or the Iraqi government in the run-up to the Turkey Presidential and Grand General Assembly

22
   Austvik, O.G, Rzayeva, G. “Turkey in the Geopolitics of Natural Gas”, Harvard Kennedy School, Mossavar-Rahmani Center,
September 2016, https://www.hks.harvard.edu/sites/default/files/centers/mrcbg/files/66_final.pdf.
23 Turkey wins gas price row against Iran in court, Hürriyet Daily News, February 2, 2016.

The contents of this paper are the author’s sole responsibility. They do not necessarily represent the views of         11
the Oxford Institute for Energy Studies or any of its Members.
elections that will take place in November 2019. Consequently, it seems that there will not be any gas
import into Turkey from KRG in the medium term and, depending on political relations between Iraq
and Turkey and stability in Iraq in general, the development of gas projects and exports to Turkey could
come online no sooner than the mid-2020s.
Israel and Cyprus could soon become new natural gas producers in the eastern Mediterranean region
with gas available to export. The reconciliation between Turkey and Israel and ongoing negotiations on
the reunification of Cyprus appear to be laying a potential political foundation for Turkey to import natural
gas from the eastern Mediterranean region. Potentially, over 10 bcm/year of natural gas could be
exported from Israel and Cyprus to Turkey through subsea pipelines, which would have to go through
Cyprus once the island’s reunification issue is resolved. However, at an estimated cost of 6.5 billion
euros, the subsea pipeline to Turkey plus field development expenses will make this project hard to
carry through and commercially unviable, especially as natural gas prices remain depressed.
According to Israeli law gas cannot be exported from Israel at a price lower than the sales price to the
domestic market, which is currently $5.25/Mmbtu and is expected to exceed $6 in the future. With
current gas prices in Europe around $6/Mmbtu and in Turkey around $7/Mmbtu, it seems that the
companies developing the fields in Israel and Cyprus have no commercial incentive to invest in building
costly infrastructure. They may end up selling their gas in the market for a below-cost price, which, with
all the OPEX, CAPEX and transportation costs, is around $8/Mmbtu. Gas transportation to Europe
through Greece and Italy would be even more costly due to the longer distance. This makes the
realization of this project unlikely for the time being. Furthermore, with TurkStream coming online after
2020, Gazprom will have capacity for price damping. Any price cut that Gazprom will grant to the Turkish
importers will significantly affect the financial feasibility of new alternative gas pipeline projects to
Turkey.
However, from the Turkish perspective, possible gas deliveries from EastMed to Turkey fully satisfy
Ankara’s interest in diversifying supply sources and accumulating as much gas as possible in the
country’s storage facilities once their capacity is expanded, not only to ensure peak delivery flexibility
but also to re-export gas to neighbouring European countries. From a political point of view, being the
major gas market for EastMed gas would put Turkey at the centre of the Eastern Mediterranean regional
geopolitical and energy network. Russia, acknowledging Turkey as its second largest market, is
concerned about Israeli natural gas penetrating not only the Turkish market, but also, through Turkey,
possibly the European market. It seems that this fact has played no minor role in the repeated attempts
by Gazprom to enter Israel's natural gas market and upstream projects, although Gazprom's attempts
to bid for a 30% share in the Leviathan field and to sign a deal to export LNG from Tamar have as yet
failed to bear fruit.24 However, whatever the political interests are, it is highly unlikely that they will
override the economics of the projects.

5. Extension of pipeline capacity—existing and new projects (TANAP and
TurkStream)
According to Turkey’s legislation, construction of new pipelines for oil and gas transit via the national
transmission system are not considered internal market activities. All such pipelines are “international”,
although ruled by the Turkish legislation. The rules for transit are set out in Transit Law No. 4586 of
2001, which also assumes the existence of intergovernmental agreements for newly built transit
pipelines between states. To date, Turkey has no natural gas transit pipeline in operation. 25 The only

24
   Austvik, O.G, Rzayeva, G. “Turkey in the Geopolitics of Natural Gas”, Harvard Kennedy School, Mossavar-Rahmani Center,
September 2016, https://www.hks.harvard.edu/sites/default/files/centers/mrcbg/files/66_final.pdf.
25
   Energy Policies of IEA Countries: Turkey. 2016 Review, IEA,
https://www.iea.org/publications/freepublications/publication/EnergyPoliciesofIEACountriesTurkey.pdf.

The contents of this paper are the author’s sole responsibility. They do not necessarily represent the views of         12
the Oxford Institute for Energy Studies or any of its Members.
existing transit pipeline in Turkey is the Baku–Tbilisi–Ceyhan pipeline, which transports Azerbaijani oil
from the Azeri-Chirag-Guneshli field to the Turkish Mediterranean port of Ceyhan.
Within the Transit Law, both the Trans-Anatolian and TurkStream pipelines are transit pipelines that will
transport 16 and 31 bcm/year of gas from Azerbaijan and Russia respectively, and will transit 10 and
14.75 bcm/year to external markets. As was described in section 3, the BOTAŞ pipeline daily entry
send out capacity will be expanded based only on TANAP and TurkStream, which will add 71.5
mcm/day combined. For Turkey, each of these pipelines has a different role to play.
TANAP, which will transport 16 bcm/year from the Shah Deniz Phase 2 development in the Azerbaijani
sector of the Caspian Sea, has significant strategic importance rather than just providing infrastructure
capacity expansion for deliveries from the eastern to the western part of the country. Scalable up to 32
bcm/year, at a total cost of $9.5 billion, TANAP, along with enabling Turkey to enhance security of gas
supply, also fully satisfies the Turkish government’s new energy policy of diversification of supply
sources, increase of import volumes into the country, and re-export of surplus gas. The sales and
purchase agreement between BOTAŞ and the SD consortium for the import of 6 bcm/year to the Turkish
market beginning in 2018 does not include a destination clause and allows BOTAŞ, when prices are at
a maximum, to re-export gas from the SD field as well as from any other potential sources available
through TANAP. According to Minister Albayrak, even though Turkey does not possess fossil fuel
resources, the country’s aim is to become a natural gas exporter in ten years’ time by accumulating
more gas in the country. Ankara aims to significantly increase its political weight with the countries to
which it will export gas and become an important regional player as a natural gas trade nexus. 26 TANAP
can play an important role in realizing Turkey’s ambitions by transporting and transiting gas potentially
from Turkmenistan, Iraq, and EastMed, if and when available.
From the perspective of Turkish interests, TurkStream is important to Turkey for two reasons: firstly,
to enhance supply security by eliminating a transit country—Ukraine—and enabling a direct line
between Turkey and Russia; secondly, by transiting 14 bcm/year of Gazprom gas to Greece, Bulgaria,
and Italy, Turkey will strengthen its position as a significant transit country not only for the gas exporting
countries, but also for the EU. This development answers Ankara’s strategy of increasing its political
weight with the help of natural gas. Moreover, Turkey’s expectations from Russia are that the Turkish
natural gas importers will be importing Russian gas through TurkStream at a discounted price and will
receive better contractual terms in return.
TurkStream will not add to Turkey’s strategy of minimizing its dependence on Russian gas supplies,
and Ankara would want to replace some volumes with a less expensive and more secure alternative,
to decrease dependence. Given the close political ties with Baku, this could be extra volumes from
Azerbaijan. However, as the Absheron field stage 2 development will not come online until the second
half of the 2020s,27 in the short- to mid-run there will not be additional volumes available for Turkey to
decrease its dependence on Russia. Having no available alternatives to achieve its goal, Turkey,
contrary to its energy policy, will strengthen its import dependence on Russia with TurkStream.
Moreover, with TurkStream, Turkey is aiming to increase the interdependence between the two
countries on gas imports/exports, through Russia becoming dependent on Turkey as a transit country
for Gazprom gas transportation to southeast Europe, the Balkans, central Europe, and it is possible
that import volumes could actually be increased if the promised price cut is granted. However, Ankara
and Moscow have delicate and vulnerable diplomatic relations which are set against the background of
the current impasse in Syria and Ukraine, where the two states have disparate political interests.
Nevertheless, they have been compelled to collaborate in a number of spheres, 28 such as multi-billion
energy projects like TurkStream and the Akkuyu nuclear power plant. Given the delicate diplomatic

26
   Minister Berat Albayrak’s speech at the INGAS conference in Istanbul on 2-3 November 2017.
27
   Absheron Phase 1 Development is scheduled to come online in 2019 with ramp up production of 1.5 bcm/year for the
Azerbaijani domestic market. The Phase 2 is under discussion and planned to come online mid-2020s with plateau production
of 5 bcm/year part of which might be exported.
28
   Turkey's uncertain gas future, Interfax Energy Special report, October 2017. Available for subscribers.

The contents of this paper are the author’s sole responsibility. They do not necessarily represent the views of         13
the Oxford Institute for Energy Studies or any of its Members.
relations, TurkStream seems to be vulnerable, and any possible political crisis between Ankara and
Moscow might lead to postponement or even cancelation of the project.
With the development of TANAP and TurkStream, Turkey for the first time ever is effectively becoming
a key transit route for the southeast European gas market. This is one of the reasons why Ankara is
actively participating in and strongly supporting both pipeline projects, almost equally. On the other
hand, it appears that Turkey, with its close collaboration with Moscow, is conducting a policy of “the
enemy of my enemy is my friend” vis-à-vis the EU, given the existing tensions between Ankara and
Brussels. With TANAP, Turkey will gain from its important transit role for the EU and its weight will only
increase if and when TANAP is operating at full capacity (32 bcm/year) given the strong political support
of the EU and also the US. In contrast, Ankara may face US sanctions if it continues to support the
Russian TurkStream project, along with strong opposition from Brussels and impaired relations with
Ukraine. Another potential risk for Turkey is that Turkey’s long-planned goal to become a regional
natural gas hub through the Southern Gas Corridor would be challenged. Having the delivery point for
Russian gas entering Europe on non-EU territory (Turkey) would allow Gazprom to avoid compliance
with EU legislation. Russia could shift responsibility for gas transportation from Turkey to the European
market onto the purchasers, who would need to request transportation through the Trans-Adriatic
Pipeline (TAP).
The initial capacity of TAP is 10 bcm/year, all dedicated to Shah Deniz 2 gas and exempted from the
EU Third Party Access requirements for 25 years. Whether an expansion of TAP to 20 bcm/year to
transport Russian gas would receive a similar exemption from the EU is not clear. If not, this would
reduce Turkey’s chance of growing as a transit hub at the crossroads of the Middle East, the Caspian
Sea, and Europe29 unless a new pipeline connection between Turkey and Europe is built when there
is a need for transiting additional volumes of gas from the potential sources available. On the other
hand, Turkey may gain from TurkStream if it manages to correctly calculate its negotiating power with
Moscow and gain strategic advantage for the long-run, rather than short-term benefits such as a price
discount. Turkey could achieve the goal of not merely being a strategic corridor but also a physical gas
trading centre, the first and only one in the region where Russian gas will be priced at the Turkey–
Greece exit point and exported on to Greece, Bulgaria, and other European countries. 30 This would
make possible gas-to-gas pricing in Turkey’s new sales and purchase contracts with its suppliers when
they come up for renegotiation, significantly affecting gas prices for Turkey. It could also turn Turkey
into both a physical and virtual gas trade hub, a long-planned Turkish goal. However, it is subject to
Ankara’s ability to gain negotiating power vis-a-vis Russia, which can be achieved by diversification of
supply sources, an important part of Ankara’s current energy policy.

6. Extension of LNG receiving terminals, FSRU and storage capacity
Within the policy of supply source diversification, Turkey is increasing its LNG receiving terminal
capacity, building 3 new FSRUs and increasing the capacity of its two existing storage facilities. The
capacity of the BOTAŞ-owned Marmara Eriglisi LNG terminal will be increased from the current 22
mcm/d to 37 mcm/d in 2018, while the Egegaz-owned Aliaga LNG terminal’s capacity will be increased
from 24.5 mcm/d to 39 mcm/d in 2021. A new Neptune Aliaga FSRU was built in 2016 in Izmir and
added 20 mcm/d capacity to the entry point. Another two new FSRU facilities, Saros on the north of the
Gallipoli peninsula and Dörtyol FSRU in the southern province of Hatay, are expected to come online
early in 2018 with a combined total 40 mcm/d of capacity (20 mcm/d each) (Map 3). The capacities of
the two existing Marmara and Tuzgölu storage facilities will also be expanded from the current 38
mcm/d to 155 mcm/d by 2021, which will allow storage of gas during the low demand period and selling
it on the domestic market when demand surges in winter time. This will also allow Turkey to import extra

29
   Austvik, O.G, Rzayeva, G. “Turkey in the Geopolitics of Natural Gas”, Harvard Kennedy School, Mossavar-Rahmani Center,
September 2016, https://www.hks.harvard.edu/sites/default/files/centers/mrcbg/files/66_final.pdf.
30
   Dastan, S.A., “Negotiation of a transboundary natural gas pipeline: An analytical contribution for the discussions on Turkish
Stream”, Energy Policy.

The contents of this paper are the author’s sole responsibility. They do not necessarily represent the views of                14
the Oxford Institute for Energy Studies or any of its Members.
volumes of gas when prices are lowest and re-sell them when prices surge during winter. As a result,
by 2021 total Turkish entry point send-out capacity including pipeline gas, LNG/FSRU, and storage will
almost double from the current 258.18 mcm/d to 473.48 mcm/d (Table 4).

Map 3: Entry points of the LNG terminals and their capacity, mcm/day

Source: BOTAŞ.
Table 4: Total entry point sendout and storage capacity, mcm/d

ENTRY POINTS                              2017            2018          2019        2020          2021            2022   2023

Malkoçlar-Balkan                           51.4           51.4          51.4         14.7          14.7           14.7   14.7

Durusu-Blue Stream                          48             48             48          48            48            48     48

Gürbulak-Iran                              28.5           28.5          28.5         28.5          28.5           28.5   28.5

Türkgözü-Shahdeniz                          19             19             19          19            19            19     19

Eskişehir-Tanap                              0             5.7          11.3          14           16.4           16.4   16.4

Trakya-Tanap                                 0              0             0            0            8.2           8.2    8.2

Kıyıköy-TurkStream                           0              0             0          46.9          46.9           46.9   46.9

M. Ereğlisi LNG                             22             37             37          37            37            37     37

Aliağa LNG                                 24.5           30.9          30.9         30.9           39            39     39

Aliağa FSRU                                 20            14.1          14.1         14.1           20            20     20

Saros FSRU                                   0             20             20          20            20            20     20

The contents of this paper are the author’s sole responsibility. They do not necessarily represent the views of          15
the Oxford Institute for Energy Studies or any of its Members.
Dörtyol FSRU                                 0             20             20          20            20             20       20

Akçakoca-TP                                0.36           0.36          0.36         0.36          0.36            0.36     0.36

Gelibolu-Marsa                             0.42           0.42          0.42         0.42          0.42            0.42     0.42

K. Marmara Storage                          25             25             25          50            75             75       75

Tuzgölü Storage                             13             20             20          30            80             80       80

TOTAL                                    252.18         320.38         325.98      373.88        473.48           473.48   473.48

Source: BOTAŞ.

As discussed above, to eliminate the 60 mcm/d gap in the daily supply capacity during peak demand,
three FSRUs with a combined total capacity of 60 mcm/d are under construction and will fully close the
supply gap and help BOTAŞ to avert supply cuts in future. By increasing LNG terminal capacity, Turkey
will also be able to increase spot LNG imports when needed. In 2016, Turkey imported 7.6 bcm/year of
LNG, including included 2.1 bcm of spot LNG (4.6% of total imports). 31 The government’s position is
that there is a glut of LNG in the world and Turkey has to take advantage of the availability, flexibility,
and low price of LNG as a result of oversupply. Furthermore, as there are constraints on the
transportation of large volumes of gas from the eastern part of Turkey to the most intense natural gas
consuming region in the west, it is more convenient to import gas in the form of LNG to the Izmir area,
in the north-west of Turkey. In the short-run, by the end of December 2017, the country’s LNG
regasification capacity will have increased to 107 mcm/d from the current 70 mcm/d (Figure 3).

Figure 3: Expected maximum send out capacity in 2017, mcm/d

Source: Argus.

Another major reason why Turkey is expanding the capacity of its LNG facilities is the issue of supply
security, especially in the wake of the crisis that followed the shooting down of a Russian Sukhoi Su-24
aircraft in November 2015. The Turkish government carried out a stress test to determine whether, and
for how long, Turkey would be able to survive without Russian gas in the event of a cut-off. The

31
     EMRA Annual Report 2016.

The contents of this paper are the author’s sole responsibility. They do not necessarily represent the views of             16
the Oxford Institute for Energy Studies or any of its Members.
conclusions of the stress test led the Turkish government to decide to increase LNG receiving capacity
to a level that would be able to fully replace Russian gas supplies when and if needed. Consequently,
depending on Turkey–Russia diplomatic relations, more FSRU terminals might come online in Turkey
in the future. However, it is most likely that even serious political tension between the two countries will
not affect Russian gas supplies to Turkey, as the Su-24 crisis showed, because of the deep
interdependence of the two countries in gas imports/exports.
LNG and pipeline gas prices in Turkey During cold months, BOTAŞ imports more spot LNG and
seeks to purchase gas from Turkish private companies that could have stocks at the Silivri storage
facility to sell during the heating season. The choice of the company depends on the competitiveness
of the LNG cargoes versus pipeline supplies. The LNG price for December 2017 for Turkey is assessed
by Argus at $8.9/Mmbtu,32 significantly above the pipeline gas price, and BOTAŞ is increasing imports
from its pipeline suppliers where infrastructure capacity allows and offsetting this by increasing the
number of LNG cargoes when increasing pipeline imports is not possible. It appears that the LNG price
for Turkey will remain high and this will motivate suppliers to send more cargoes to this premium market.
However, seeking to import such expensive gas is a true impediment for private companies competing
with BOTAŞ’s gas price in the domestic market. Because the BOTAŞ gas price to eligible customers is
subsidized by the government, private companies have to sell the gas at a discounted price to be
competitive. They were able to sell gas at a profit before the depreciation of the Turkish lira against the
dollar, but at the moment, with the current controlled prices, it is almost impossible to sell gas with an
acceptable margin on the domestic market. This is why the government, through BOTAŞ, initiated a
scheme of support to private FSRU companies and guaranteed to lift gas at an agreed price and amount
on a long-term basis. The Turkish government gives a purchase guarantee of LNG for a 10-year period
at a price which gives the importers a small margin, and given the higher price of imported LNG, the
government also subsidizes the BOTAŞ LNG sales in the domestic market.
More LNG receiving facilities including FSRUs will allow more private companies to import gas from
various sources and bring extra gas volumes to Turkey. To comply with NGML 4646, the backbone of
Turkish gas market regulation, private companies are not allowed to conclude contracts with and import
gas from countries that have an active supply agreement with BOTAŞ. However, they are allowed to
import LNG from those same countries. This will foster competition in the domestic market and make
import prices as well as the domestic balancing price more competitive, if and when the NGML is fully
implemented. The parliament has yet to decide when the market liberalization process in accordance
with the proposed legislation will be introduced.
Turkey is emerging as a competitive LNG market with underutilized regasification capacity for the
current and potential LNG suppliers. The higher LNG price in the Turkish market is encouraging
countries such as Qatar to enter the market with a longer-term perspective. Qatargas has signed a
three-year sales and purchase agreement with BOTAŞ to deliver 1.5 mtpa of LNG,33 and it is expected
that the contract will be extended. Apart from commercial reasons, the deal with Qatar could also be
deemed to be a demonstration of friendly diplomatic relations between Doha and Ankara, as Qatar is
the only country in the Middle East which is aligned with Turkish political interests in Syria and Iraq, and
Turkey is opposed to the sanctions imposed by Saudi Arabia against Qatar.
Storage. As shown in Table 5, the Turkish government is planning to more than triple Turkey’s
underground storage capacity at its two facilities at North Marmara-Değirmenköy in Silivri and Tuzgölü
from the current 3.09 bcm to 10 bcm by 2023. The injection capacity of the Turk Petrollari (TP)-owned
North Marmara-Değirmenköy storage will be increased from the current 16 mcm/d to 45 mcm/d in 2020,
while at the BOTAŞ-owned Tuzgölü salt cavern storage facility, 150 km south-east of Ankara, injection
capacity will be increased from 15 mcm/d to 60 mcm/d in 2018.

32
  Argus LNG Daily, 14 November 2017.
33
  Qatargas to sell annual 1.5 mln tonnes of LNG to Turkey's Botas, Reuters.com,
https://af.reuters.com/article/commoditiesNews/idAFL5N1M11CL.

The contents of this paper are the author’s sole responsibility. They do not necessarily represent the views of   17
the Oxford Institute for Energy Studies or any of its Members.
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